I might be tempted to catch the next flight out

Kitty Miv, Editor26 October, 2015

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

I rarely agree with Jean-Claude Juncker on anything, but on this occasion he's right: Europe, or more precisely the European Union, has had its day. In a remarkably downbeat assessment of the state of the European project, while delivering a speech in Madrid, Juncker chose biblical references in his description of the 2015 version of the EU. Juncker likened the EU to the "vale of tears," the place where Christians' earthly woes are left behind when they ascend to heaven. He went on to say that, compared with the optimism and vibrancy he sees when he visits other parts of the world, places like Brussels and Luxembourg feel like a "valle Lacrimarum" or valley of fears when he comes home.

To some extent, there's not very much that the EU can do to turn this around because it is battling economic forces that are very hard to control. As Juncker observed, like most mature, developed economies, its population is aging, and it is producing less and less as a share of the world's economy, while the emerging nations are producing more and more. Indeed, the EU's share of global output will soon represent just 15 percent, he said. But many of the wounds are self-inflicted, aren't they; European governments chose to gorge themselves on debt and, in many cases, stifle investment with high taxes and uncompetitive regulations. And tax initiatives at EU level seem to have only exacerbated the problem. In its obsession with making sure everyone pays their "fair share" of tax (although nobody's been able to tell me what that is yet), the EU has taken its eye off the ball and legislated for some self-defeating measures. Take, for instance, the VAT place of supply rule changes for electronically provided services, which have driven many traders and small firms out of business since the beginning of this year. The latest own goal could turn out to be the decision to deem certain tax rulings made by the tax authorities in the Netherlands and Luxembourg illegal state aid.

I suppose you can't blame the public for seeing such arrangements as cosy deals between big business and the taxman, especially when most people have little choice about how much tax they pay. But these rulings do serve an important purpose in that they provide certainty to multinationals about their tax affairs, allowing them to plan and execute investments, often over timeframes spanning several years. If this facility suddenly becomes unavailable, or is subject to uncertain outcomes, they may well take their investments elsewhere. As Heather Self, Partner at Pinsent Masons, said in reaction to the news, multinationals will be "particularly anxious" about the Starbucks case because the ruling process in the Netherlands is long-established and very well-respected internationally. "For competition authorities to challenge very technical tax rulings by competent authorities in this way is extremely destabilizing," she warned. The trouble is, the precedent has been set, and companies will be wondering how many other tax rulings issued by national tax authorities will be challenged in this way. The valle Lacrimarum just seems to get deeper and deeper.

Given that legal certainty is prized above all by investors, the cardinal sin of tax-law making, apart from legislating retrospectively, is to keep changing your mind about a particular proposal. In this regard, the UK Government has done itself no favors by continually u-turning on the tax status of non-domiciled individuals. As part of plans to make sure that non-doms pay their "fair share" (that hollow phrase again), the Government has proposed they should pay tax on loans secured by foreign assets. However, HM Revenue and Customs has changed its position on the matter twice in the last 18 months, and now it transpires that non-doms won't have to pay this additional tax for past years. However, if I was a non-dom, I wouldn't be counting my chickens just yet – what's to stop HMRC changing its position yet again? Indeed, one aspect or another of the non-dom tax rules must have changed every year since former Chancellor of the Exchequer Alistair Darling first introduced the "remittance basis charge" back in his 2008 Budget. Some non-doms must now be wondering whether the tax benefits of their status are worth the hassle of trying to claim them, when the goalposts seem to be constantly shifting – but maybe that's the Government's intention. Add to this the popular view that non-doms are wealthy foreign tax dodgers who contribute little to the UK economy – a view that might be justified in a small minority of cases, but by no means in all – I might be tempted to catch the next flight out of Heathrow.

I'm not sure how you can come to the conclusion that tax compliance has got 23 percent easier from one year to the next. But apparently it has in New Zealand. Still, this isn't a criticism. If the pain of interacting with the tax man has abated by almost a quarter, this is no bad thing. And I'd like to award at least one encomium this week, so New Zealand gets it. In fact, it might surprise some to learn that New Zealand is a pretty welcoming place for investors altogether, according to the various barometers measuring the tax and business climate in countries around the world. The World Bank says that New Zealand is the easiest place in the world to start a business, with company founders encountering just one procedure and the process taking just half a day on average. This compares with an OECD average of five procedures and a completion time of more than nine days. Indeed, in its Doing Business Index 2015, the World Bank placed New Zealand in second place in terms of overall ease of doing business, just behind Singapore in the league table of 189 jurisdictions. New Zealand has also had a long presence in the upper echelons of the Heritage Foundation's Index of Economic Freedom, and this year it is deemed the third-most free economy in the world, beaten only by Hong Kong and Singapore. Unfortunately, New Zealand still has a little way to go to reach the top of PwC's ease of paying taxes indicator, where it sits 22nd out of 189 jurisdictions. But it's comfortably ahead of Australia in 39th. And if nothing else, getting one over the Aussies will doubtless make many kiwis cheer.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

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